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As tenants moved to new buildings, the Nagoya Grade A vacancy rate declined for a second consecutive quarter, dropping 0.1 percentage points to 4.1%

Rents rose in all regional cities

■ Tokyo 23 Wards

In Q2 2016, the All-Grade vacancy rate in Tokyo's 23 Wards declined by 0.3 percentage points q-o-q to 2.4%, the fourteenth consecutive quarterly fall. Demand this quarter was focused on Grade A and other new buildings. Companies continued to increase hiring, with the jobs-to-applicants ratio reaching its highest level in close to 25 years. The office market continued to see demand from companies looking for larger offices. Tenants are more likely to consider new buildings because it has become difficult to find extra space in their existing buildings.

As the yen appreciation continues, there is increasing concern about the earnings outlook for Japanese companies. If the yen continues to strengthen, it is quite possible that some tenants could postpone office relocation plans. Some landlords have also begun to adopt a more flexible stance, in some cases agreeing to longer rent-free periods.

The Grade A vacancy rate in Tokyo declined 1.0 percentage points q-o-q to 1.9% in Q2 2016, taking it below 2% for the first time since Q1 2008. The quarter saw two new Grade A buildings reach completion with full occupancy. Demand came mostly from major internet service companies, Japanese financial institutions, companies relocating to larger offices or single sites, and companies looking to upgrade their offices to improve Business Continuity Planning (BCP). Large spaces were also let in a number of new buildings that still had remaining space. Two Grade A buildings that are scheduled for completion by the end of the year still have space available, most likely because their asking rents are slightly above market level. It is plausible that this could remain the case after completion.

Grade A assumed achievable rents rose by 1.4% q-o-q to JPY 35,400 per tsubo in Q2 2016. As well as new buildings pushing up average rents, asking rents for cheaper buildings (under JPY 30,000 per tsubo) increased, as it did in the previous quarter.

"Many companies are moving for positive reasons, such as to grow their business or to upgrade their building, and corporate demand for offices remains buoyant," commented Hideki Maruyama, executive director of CBRE's Office Services team in Japan. "The declining vacancy rate has also exacerbated the shortage of available space. However, some tenants have started to hold off on decisions as a large volume of supply will enter the market from 2018 onwards. Some owners have started to offer more flexible terms for buildings that have been less successful in letting space."

■ Osaka

The Osaka All-Grade vacancy rate declined by 0.4 percentage points q-o-q to 4.9% in Q2 2016, falling below 5% for the first time since Q3 2008 and returning to levels last seen before the onset of the Global Financial Crisis (GFC), also in 2008. The vacancy rate declined q-o-q for both Grade A and Grade B buildings. Vacancy rates also fell in every area of Osaka except the Dojima area. The period saw healthy demand for office space from tenants of various sizes - from nationwide corporations to medium-sized businesses. A wide range of tenants also relocated to improve the location and/or grade of their building.

The Osaka Grade A vacancy rate fell 0.3 percentage points q-o-q to 4.5% in Q2 2016. While large corporations are becoming more cautious because of the uncertain economic outlook, none have cancelled or postponed relocation plans thus far. With that said, their guarded approach is evident in Grade A assumed achievable rents which were flat q-o-q.

"This quarter saw the All-Grade vacancy rate fall below 5% for the first time in eight years," commented Takashi Katono, executive director of CBRE's Osaka branch. "CBRE was expecting an increasing number of companies to take a more cautious approach towards relocation because of the uncertainty of the economy. However, companies are still keen to expand or to rent additional space, and they have not started to cancel or postpone their relocation plans as of yet. The rate of decline in vacancy rates is likely to slow, but the downward trend remains in place."

■ Nagoya

The All-Grade vacancy rate in Nagoya declined by 0.1 percentage points q-o-q to 4.1% in Q2 2016, the tenth consecutive quarterly fall. The period saw demand mainly from companies wishing to take additional space in their existing buildings, open new offices, or move into rented properties because their own buildings had become obsolete. There was strong demand for small new offices, and in a few cases, vacant spaces were filled by further dividing units that were already subdivided. This even took place in aged buildings. Activity amongst larger tenants was minimal, as they are awaiting the completion of several large buildings between now and 2017.

The Nagoya Grade A vacancy rate declined by 0.4 percentage points q-o-q to 3.0% in Q2 2016, the second consecutive quarterly fall. Tenants from outside the city looked to new buildings as they sought larger office spaces and a means to attractive talent. Assumed achievable rents for Grade A buildings were flat q-o-q at JPY 23,650/tsubo. There are only a few Grade A buildings with space available and a large building that was completed this quarter is already at full occupancy. It is clear that the Nagoya market remains tight.

"Space available for relocation has been reduced and tenant activity has been constricted. That said, office demand remains resilient and secondary spaces are being taken up quickly. The supply-demand balance will remain tight in the coming quarters," commented Takahiro Fujimoto, executive director of CBRE’s Nagoya branch.

■ Nationwide

Vacancy rates declined q-o-q in all thirteen cities surveyed in Q2 2016. Corporate demand for offices was buoyant nationwide, and tenants continued to take additional space, move to larger premises, and open new offices. In Sapporo, where a financial institution took extra space and small tenants opened new offices, the vacancy rate declined by 0.8 percentage points q-o-q to 1.5%, the first time it has been under 3% since CBRE's surveys began in 2003. In Fukuoka, a large building adjacent to Hakata Station was completed with full occupancy, and the vacancy rate declined by 0.2 percentage points to a record low of 2.2%. In the Greater Tokyo area, the vacancy rate in Saitama declined by 0.1 percentage points q-o-q to 2.1%, while in Yokohama, which benefited from companies relocating from Tokyo to a single location, it fell by 0.3 percentage points to 4.4%.

Assumed achievable rents rose in all ten regional cities. The largest rise was in Sapporo, where rents rose 2.3% q-o-q. In Fukuoka rents rose by over 2.0% for the second consecutive quarter. In Hiroshima, rents rose for a wide range of properties, registering an overall increase of 1.4% q-o-q.